Transparency initiative annual report

AZERBAIJAN EXTRACTIVE INDUSTRIES

TRANSPARENCY INITIATIVE

ANNUAL REPORT

Table of Contents

INTRODUCTION 8

Background 8

Scope of work 8

Confidentiality of data 10

Approach and Methodology 10

Accounting policy 12

1. EITI REQUIREMENT 1 14

2. EITI REQUIREMENT 2 16

2. Background 16

2.1. Legal and Fiscal Regime 18

2.1.1. Legal regime 18

2.1.2. Fiscal regime 22

2.1.3. The structure of the government budget system 23

2.1.4. Roles and responsibilities of the relevant Government agencies 26

2.1.5. Ongoing reforms in the extractive industry 31

2.2. Allocation of licenses 31

2.3. Register of licenses 33

2.4. Contracts 34

2.5. Beneficial ownership 34

2.6. State participation in extractive industry 34

2.6.1. Background 34

2.6.2. Relationship between state-owned enterpirses and Government agencies 36

2.6.3. Payments to the State Budget by state-owned enterpirses 40

2.6.4. Financial performance and production data of state-owned enterprises 41

2.6.5. Joint Ventures, associates and subsidiaries of state-owned enterpirses 42

2.6.6. Loans and guarantees received by state-owned enterprises 44

2.6.7. State-Owned Enterprise activities in foreign markets 45

3. EITI REQUIREMENT 3 46

3.1. Overview of the Mining Industry 46

3.2. Production volume 52

3.3. The share of the export in the extractive industry 54

4. EITI REQUIREMENT 4 55

4.1. Taxes and revenues to be covered in the EITI Report 55

4.1.1. Significant payments 55

4.1.2. The allocation and payments made to government and their description 55

4.1.3. Reconciliation results 56

4.1.4. Extractive Companies 60

4.2. Sale of the state’s share of production 64

4.3. Infrastructure provisions and barter arrangements 64

4.4. Transportation revenues 65

4.5. Transactions related to State-owned enterprises 70

4.6. Sub-national payments 70

4.7. Level of disaggregation 71

4.8. Data timeliness 71

4.9. Data quality and assurance 72

5. EITI REQUIREMENT 5 74

5.1. Distribution of extractive industry revenues 74

5.2. Sub-national transfers 76

5.3. Revenue management and expenditures 76

6. EITI REQUIREMENT 6 78

6.1. Social expenditures 78

6.2. Quasi-fiscal expenditures 80

6.3. Contribution of the extractive industry to the economy of Azerbaijan 80

6.3.1. Industry and Field structure of GDP 80

6.3.2. The state revenue from the mining industry 81

6.3.3. Employment in the extractive industry 84

6.3.4. Key regions (areas) where production is concentrated 86

6.3.5. Other information 88

7. RECONCILIATION RESULTS 89

7.1. Reconciliation by revenue stream (foreign companies) 89

7.2. Reconciliation by extractive Company (foreign companies) 91

7.3. Reconciliation by extractive companies (local companies) 93

7.4. Reconciliation by revenue stream (local companies) 94

7.5. Payments made to Government according to PSA 95

7.6. Adjustments 97

8. SPECIAL AUDIT PROCEDURES 101

9. RECOMMENDATIONS AND RESULTS 103

9.1. Lessons learned from the 2015 reconciliation 103

9.2. Follow up of the recommendations of the 2014 EITI Report 105

ANNEXES 109

Annex 1. Statement of the EITI Committee of the Republic of Azerbaijan 110

Annex 2. Reporting templates 111

Annex 3. Reconciliation sheets by extractive companies 112

Annex 4. List of Non-Governmental Organisations and individuals party to the Memorandum of Understanding 152

Annex 5. Bibliography used in compiling of the report 155